This document discusses the challenges that shifts in fuel availability and price volatility pose for capital expenditure and financing decisions in 2020 and beyond. It notes that demand for high sulfur fuel oil will decrease significantly while demand for marine gas oil, very low sulfur fuel oil, and liquefied natural gas increases. This fuel shift creates uncertainty around what fuels markets will clear at and challenges for refiners. It also discusses the financing difficulties created by investing in scrubbers or switching to compliant fuels and the role that hedging strategies can play in mitigating risks for various compliance approaches.

1. Counting the cost – 2020 price volatility, capital
expenditure and the financing challenge
ARACON 2018 Rotterdam – 25 October 2018

2. The key is not
to predict the
future, but to
be prepared for
the future
Pericles, 495-429 vC

3. 1) Shifts & availabilities in fuel – volatility coming 2020 (and earlier!?...)
2) (Fuel) market reactions
- expected
- today
3) Investment decisions, CAPEX & impact of price risk
4) Financing challenge, who will pick up the bill & support of hedging
strategies

4. Huge displacement – can refiners and blenders close the gap? Will suppliers isolate storage & logistics?
0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
5
2017 2018 2019 2020 2021 2022 2023
Shift in demand by grade (million barrels per day)
HSFO MGO VLSFO LNG
Source: IEA, ICC Consultants

5. 1%
13%
Under 1%
0
20
40
60
80
100
120
Ferries Cruise ship Bulk carrier Chemical/oil
tanker
Container
vessel
LPG/gas
carrier
Other
Penetration of scrubbers in core segments as of Sep
2017 (number & % of segment)
Scrubbers are not a full scale solution – so on what fuel will markets clear in different segments?
Source: Clarksons

6. Forward price spreads implying some level of compliance – or are these non-commercials
and still a (long) way to go in spot markets to arrive?
150
200
250
300
350
400
HSFO/MGO forward spread past two years
Today April 2018 October 2017 October 2016
Source: Bloomberg terminal, ICC Consultants

7. 150
200
250
300
350
400
Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18
HSFO/MGO forward spread past two years
Historical spread HFO/MGO 2019 forward Historical spread HFO/MGO 2020 forward
Historical spread HFO/MGO 2021 forward
Today – fuel market reactions to trends/decisions in scrubber orders, refinery investments, etc.

8. Competitive concerns
- risk/reward points to wait-and-see
approach
- but… first mover advantage could be
huge
Owner’s CAPEX, risk of sunk cost?
Refineries and owners ‘catch 22’
Payback time(s) scrubbers @ different
price spreads
0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
0
5.000.000
10.000.000
15.000.000
20.000.000
25.000.000
$150 $200 $250 $300 $350 $400 $450
CAPEX (incl. Operational), MGO premium &
payback periods (300 days at sea)
PMGO Suezmax PMGO Capesize bulker
PMGO Container (Post Panamax) CAPEX Suezmax
CAPEX Capesize bulker CAPEX Container (Post Panamax)
PP Suezmax PP Capesize bulker
PP Container (Post Panamax)
Source: Marex Spectron, ICC Consultants
$ Years

9. The financing
headache
Charter
premium?
Price spread
and
volatility?
Leasing? Off-
balance?
Equipment
remains
commercial?
Economic
life?
Slow
steaming?
Risked? Sunk
cost?
Existing
vessel finance
LTVs,
newbuilds?
Acceptance of
new BAFs?
Maintenance
and sludge
disposal cost?
HSFO supply?
(2nd Lien)
Rates?

10. Hedging the (worst case)
downside to any strategy
decision is key
Triggering & sustaining a scrubber
investment decision
• Locking in the price spread through paper hedge
• Securing first mover advantage
• Mitigate worst case risk of sunk investment
No scrubber, compliance through
VLSFO or MGO
• ‘Paper scrubber’
• Maintaining competitive position vs. first movers and
laggards
Limited acceptance of new BAFs or
increase of fixed rate COAs
• Paradigm shift to operators’ liability
• Fixed rate affreightment contracts
• Contract level or portfolio segment hedging

11. Q & A

12. Robbert Marneffe
Director, principal consultant Commodity Risk Management
r.marneffe@icc-consultants.nl
+31 6 290 66 173